Underwriting is the first and most important way to control delinquency. In the NCM Institute’s BHPH training programs, “BHPH Underwriting and Collections Management” and “A Culture of Collections,” we discuss underwriting and collections best practices in detail, but the first line of defense against out-of-control delinquencies is to determine the amount of risk you want to endure and design your underwriting to fit that business model. You should sell vehicles that are in a price range aligned with your risk model, so that your losses are tolerable and the customers you are selling to are happy to pay for the vehicle after they purchase it. In my operations we used a strong closing with visual aids to help the customer remember what they agreed to.
From the moment our sales people “upped” a customer, they were working to assist in collections. Our sales people knew there job was to gather information. We trained everyone about the process of underwriting and how it affected the collector long after the car left the lot. One step in our process was after the underwriter approved the customer, our sales people would use a handwritten document to write up trade figures, pickup payments, regular payments and payment dates (always paydays). The handwritten page was signed by the customer and kept on file. Later, if disagreements ensued during collection efforts, having that handwritten page usually ended the argument quickly. Most of the time when a customer disagreed with collector activity it was not about your actions as a dealer. It is usually about their job/family situation or ill-advised spending when they should be paying their bills first.
Another important way to control delinquency is to make sure your collector is being diligent and organized. If a customer cannot pay the full payment due, your collector needs to receive a payment agreement from the customer when they call or come in. Whatever that agreement, your collector must follow up and attempt to make the customer adhere to it. Being flexible is important when dealing with people. Flexible is agreeing to change payment dates when paydays change, helping customers who have fallen behind by waiving late fees, or deferring payments for them if they prove the reason given. Both sides should follow an agreement put together between customer and collector.
Remembering that you are dealing with human beings is important. Establishing LTR (Like, Trust, Respect) with the “regular contacts” should be a goal of your collectors. I worked with our collection and cashiering staff to make sure they were friendly and understanding (within limits) so customers wouldn’t avoid calling for fear of explaining an issue to an unsympathetic ear. Being flexible is important, but customers are people and you should listen with a dose of skepticism. My collectors asked customers to bring proof of whatever story they are telling (doctor bill, check stub, garnishment notice, funeral program) in exchange for our forgiving a late charge or deferring a payment.
In our operation, I would be the only person who could physically make account changes. That way, I was involved in the decision and the collectors kept me in the back of their minds when talking to someone about an account. If the customer broke two agreements, we picked up the vehicle in an attempt to show the customer we were serious. In many cases, if the car was redeemed, the payments on the repo would be paid more consistently in the future. Do not allow your customers to think you are the easiest of their payments to miss while they pay other bills or buy lottery tickets. Also, give the car back to them. If the customer comes in, seems to understand the importance of keeping current and has some money (and proof of insurance), work with them.
Thirdly, the way you handle mechanical failure plays a huge role in your delinquency rate. If the car won’t go, they won’t pay. You have to decide how you are going to handle breakdowns and make sure your customers understand your policy so expectations are controlled later. We offered a third party, 24,000-mile extended service plan on every vehicle we sold and had penetration on 98 percent of our loans. The policy covered far more than just the power train and allowed our customers to receive repairs for a small deductible while our shop consistently made a profit. The service contract we used offered nationwide roadside assistance and up to 150 miles per incident towing so our vehicles were not left on the side of the road or in a parking lot. Even if the service policy’s expiration date or mileage limit had passed, many of our customers would still call to check coverage, which informed us of a problem.
Controlling delinquency is about anticipating problems that arise in our business and having policies in place to deal with them. In most cases, delinquencies are personal customer issues projected onto you. Making certain your associates and customers understand your expectations in each situation will help you keep better control of your portfolio performance.